President Nayib Bukele, a cryptocurrency enthusiast, has promoted the initiative as one that would offer multiple economic benefits.
Making Bitcoin legal tender, he said, would attract foreign investment, generate jobs and help “push humanity at least a little in the right direction.”
His ambitions extended to building an entire “Bitcoin city”, a tax-free paradise funded by issuing $ 1 billion in government bonds. The plan was to spend half of the bond revenue on the city and the other half on the purchase of Bitcoin, with alleged profits then used to pay off bondholders.
Now, a year later, there is more than enough evidence to conclude that Bukele – who even called himself “the coolest dictator in the world” in response to criticism of his creeping authoritarianism – had no idea what he was doing.
This daring financial experiment turned out to be an almost complete failure.
Making Bitcoin legal tender
Making Bitcoin legal tender meant much more than allowing Bitcoin to be used for transactions. It was already possible, as in most (but far from) countries.
If a Salvadoran wants to pay for something in bitcoin and the recipient is willing to accept it, they can.
But Bukele wanted more. Making bitcoin legal tender meant a beneficiary I had to accept them. As the Legislation 2021 he said, “every economic agent must accept Bitcoin as payment when it is offered to him by anyone who acquires a good or service.”
Read More: Can Bitcoin Be A Real Currency? What’s wrong with El Salvador’s plan
To encourage the adoption of Bitcoin, the government created an app called “Chivo Wallet” (“chivo” in slang means “cool”) to exchange bitcoins for dollars without transaction fees. It also came preloaded with US $ 30 as a bonus (average weekly income is around US $ 360).
Yet despite the law and these incentives, Bitcoin has not been adopted.
Accepted with little enthusiasm
A nationally representative survey conducted in February of 1,800 Salvadoran households indicated that only 20% of the population used Chivo Wallet for Bitcoin transactions. More than double that number downloaded the app, but only to claim $ 30.
Among respondents who identified themselves as entrepreneurs, only 20% said they accept bitcoin as a payment. These were typically large companies (among the richest 10% of companies by size).
Commercial acceptance of Bitcoin in El Salvador
A survey for the El Salvador Chamber of Commerce in March found that only 14% of businesses transacted using Bitcoin.
Making huge losses
Fortunately for the Salvadorans, the $ 1 billion Bitcoin bond scheme didn’t come up with anything. But the Bukele government still spent more than $ 100 million to buy bitcoins, which are now worth less than $ 50 million.
When Bukele announced his plans in July 2021, Bitcoin was worth around $ 35,000. When the legislation went into effect on September 7, 2021, it was around $ 45,000. Two months later, it peaked at $ 64,400.
It is now trading at around $ 20,000.
Bukele did self-congratulatory tweet on “buy the dip” but nearly all government-bought bitcoins were for more than $ 30,000, at an average price of over $ 40,000.
A year ago, Bukele was urging its citizens to keep their bitcoin money. For anyone who did, the losses would be devastating.
Bukele’s misunderstanding towards Bitcoin – and the economy more generally – has been proven time and again.
In June 2021 he tweeted: “Bitcoin has a market capitalization of $ 680 billion. If 1% of it is invested in El Salvador, this would increase our GDP by 25%. ”
This suggests that he seemed to think Bitcoin was some sort of investment fund. He also showed that he didn’t understand GDP. Foreign investment is not a component of GDP. There has been no increase in foreign investment or GDP.
In a January 2022 tweet he claimed that “a giant price hike is only a matter of time” because there will only be 21 million bitcoins while there are 50 million millionaires in the world. “Imagine when each of them decides to own at least ONE #Bitcoin,” she proclaimed. Since then, Bitcoin’s value has halved.
The rest of the world is not impressed
The Bitcoin plan negatively impacted El Salvador’s credit rating and relations with the International Monetary Fund. With investors more wary of lending to the country, local borrowers have had to offer higher interest rates.
In January, the IMF urged El Salvador to revoke Bitcoin’s legal lender status due to “major risks to financial and market integrity, financial stability and consumer protection.” Bitcoin is known for its use in scams and other illegal activities, as well as its volatility.
Bukele tweeted a dismissive response involving a Simpsons-themed meme.
This seems particularly reckless, as El Salvador has sought a loan of over $ 1 billion from the IMF.
International credit rating agencies Fitch downgraded El Salvador’s rating this year, citing concerns about its Bitcoin policies.
Read more: Cryptocurrencies are great for gambling, but bad at freeing our money from big central banks
No other country with its own currency, not even those like Zimbabwe and Venezuela with discredited currencies, has followed suit and made Bitcoin legal tender.
Given El Salvador’s record, it’s unlikely it ever will be.